Chapter 2
Views on the package of bills
2.1
This chapter evaluates the level of stakeholder support for a new tax
system for managed investment trusts before examining concerns raised by
stakeholders in regard to a number of specific provisions.
General views on the package of bills
2.2
The AMIT legislation has been in development since 2010 and has benefited
from extensive consultation with all of the major stakeholders, including the
Financial Services Council (FSC), Property Council of Australia (PCA) and the
Australian Custodial Services Association (ACSA).[1]
2.3
All of the submissions received from stakeholders indicated support for
the introduction of a new tax system for managed investment trusts. The FSC
fully supported the passage of the regime as currently formulated, noting:
There has been open and honest consultation with industry stakeholders
and the regime is now workable and effective. We believe the legislation that
has been presented to Parliament is a good compromise between the industry
desire for simplicity versus the complexity of integrity measures to ensure
compliance.[2]
2.4
Recognising the need for Australia to have world class asset management
rules for MITs, EY supported:
...tax reform for MITs and this package of optional AMIT
measures (for eligible MITs) should be of overall significant benefit to the
managed funds industry.[3]
2.5
The PCA outlined the benefits for the property investment industry:
The reforms will provide certainty to industry and help
attract patient long term capital that Australia needs to build prosperity.[4]
2.6
Even ACSA, which raised concerns with specific provisions of the bill,
were:
...generally supportive of the MIT reforms and the certainty
created around long standing anomalies and gaps in the current trust tax
legislative framework.[5]
2.7
Many stakeholders also welcomed the development of Law Companion Guidelines
being released by the ATO prior to the legislation being enacted to complement
the introduction of the new tax system.[6]
To reduce risks associated with implementing the new tax system, the Australian
Institute of Superannuation Trustees (AIST) advocated for continued development
of the Law Companion Guidelines and other ATO rulings.[7]
Post‑implementation review
2.8
Given the importance and complexity of the AMIT reforms, support for a
post‑implementation review has been suggested throughout the legislative
development process.
2.9
The need for a post‑implementation review was first raised in the
2009 report by the Board of Taxation:
...the Board is concerned to ensure that industry practices do
not develop that would undermine the integrity of the new MIT regime. To help
address that concern, the Board is recommending that a Post‑Implementation
Review of the new MIT regime should be conducted after the legislation has been
in operation for at least two years.[8]
2.10
Stakeholders also supported a post‑implementation review. For
example, EY recommended that a formal Treasury review be undertaken before the
first year of operation as:
Even with the excellent efforts of Treasury, the ATO and the
industry sectors, it is inevitable that the Bill will require fine tuning.[9]
2.11
Some stakeholders considered that legislative amendments at this late
stage were undesirable as this would affect implementation and indicated that a
post‑implementation review would enable any issues that arose during implementation
to be addressed.[10]
In particular, the FSC was concerned that:
...any changes proposed by Parliament will not have the benefit
of consultation between key users of the regime, Treasury or the ATO, and may
result in adverse and unintended consequences.
We note the legislation is detailed and for that reason, we
understand that there is universal support amongst stakeholders that a post‑implementation
review be undertaken within 18–24 months of passage. This will allow a formal
mechanism for review of any unintended consequences that may arise as industry
moves into the implementation phase.[11]
2.12
The committee understands that Treasury has put forward a proposal to
monitor the MIT reforms post‑implementation.[12]
The committee is confident that, where required, Treasury will be able to
respond to any unforeseen circumstances and put forward a case for government
to enact legislative change and remedy urgent issues that might arise. That
said, this is a significant and substantial reform which the committee believes
would benefit from a comprehensive and timely post‑implementation review.
Concerns with specific provisions of the bills
2.13
While submissions were generally supportive of the new tax system for
AMITs, a few stakeholders raised significant concerns in relation to the effect
of the reforms on custodians and the feasibility of the commencement date.
Withholding tax liability
2.14
In its submission, ACSA raised concerns that the withholding tax (WHT)
rules contained in the new tax system would have widespread implications for
foreign investors and custodians. It had raised these concerns about WHT
liabilities for custodians with Treasury and the ATO on several occasions previously
through the legislative development process:
Ultimately, Treasury attempted to address our concerns by
introducing a custodian indemnity—ACSA believes this is not sufficient because
it introduces credit risk issues for custodians and is unlikely to be effective
where the foreign client has sold out its units prior to the NRWHT [Non-Resident
Withholding Tax] liability arising.[13]
2.15
As currently drafted, ACSA contended that trustees would not face any
negative consequences where AMITs do not pay a sufficient cash distribution to
cover the custodian's WHT liability. By contrast, custodians would have to
recover the shortfall from foreign clients or pay the WHT liability from its
own funds. The risk for custodians is heightened when foreign investors have
sold out or are no longer with the custodian at the time the WHT liability
arises. In addition, ACSA was concerned that WHT liabilities can be triggered
for 'deemed payments' where no cash distributions are made, and that it is
likely that these types of payments would be very common.[14]
2.16
A number of stakeholders responded to the WHT concerns raised by ACSA.
The FSC commented that such situations were unlikely to occur:
Whilst the MIT Regime theoretically allows a trust to
attribute a tax liability to an investor and not provide sufficient cash to
cover this liability, the situation would not arise in practice. FSC members
have clearly indicated that the attribution regime will not result in changes
to distribution policy. This is particularly the case in retail funds, where
investors must be provided with product disclosure statements under Corporations
Law requirements. The commercial reality of suddenly changing distribution
policy when investors are expecting income from a fund makes it highly unlikely
and unpalatable for a trustee to do.[15]
2.17
In its response to questions on notice, Treasury noted that MITs face
significant commercial pressure to pay out enough cash to cover any resulting
tax liability. As a result, the circumstances described by ACSA would only
occur in rare and exceptional cases.[16]
2.18
Similarly, the PCA sought to allay concerns about how the WHT provisions
might affect the property sector:
Listed property trusts generally have a stated distribution
policy... In all but exceptional circumstances, listed property trusts distribute
more than 30% of the taxable amounts subject to withholding tax (thus the cash
distributions are sufficient to cover the withholding tax obligations).
There could be rare situations where cash distributions are
less than the withholding tax liability, for example, a financial crisis across
the market, or the sale of a significant assets where the capital gain in
reinvested in the fund...[17]
2.19
However, the PCA went on to highlight that the government had put in
place indemnity for custodians:
Under the proposed rules, in these rare circumstances, the
custodians would have the withholding tax liability, however, the rules also
provide the custodians with a right of indemnity against the non‑resident
investor on whose behalf they hold the interest in the AMIT to recover any
amounts paid.[18]
2.20
Treasury highlighted that custodians typically have indemnity provisions
in their custody agreements and that:
If the custodian expects that there may be further potential
withholding tax obligations, it could trigger clauses in its custody agreement
allowing it to retain sufficient fund pending the finalisation of any
withholding tax obligations. We understand that these clauses are already
commonly included in custody agreements. Custodians can update their agreements
to minimise any remaining risk, if required.[19]
2.21
Further, Treasury informed the committee that the ATO would also take
into account circumstances where a custodian was seeking to recover a WHT
liability from a client when negotiating arrangements for payment.[20]
2.22
ACSA was also critical of the AMIT system adopting an attribution basis
for determining WHT liabilities, noting that 'This novel approach to WHT
collection is unique in the OECD world'.[21]
2.23
Treasury was adamant that the new tax system for AMITs does not change
the broad framework for non‑resident withholding tax:
The withholding tax provisions in the MIT Bills before
Parliament merely ensure that the withholding framework works in an attribution
context.[22]
2.24
A potential divergence in the definition of 'fund payment' for AMITs and
existing MITs was highlighted in the ACSA submission as an important issue
because the 'fund payment' is the base amount on which withholding tax is
calculated.
2.25
The committee understands that it will be necessary to develop new
withholding tax systems processes to administer the new tax system and the
definition of 'fund payment' is pivotal to correctly define the base amount.
2.26
Treasury indicated to the committee that:
...the new MIT rules are not intended to change the broad
framework for non-resident withholding tax. The withholding tax provisions in
the MIT Bills before Parliament merely ensure that the withholding framework,
including the fund payment concept, works in an attribution context.[23]
2.27
While recognising the concerns of the custodians, the committee agrees
with the majority of stakeholders that the legislation should neither be delayed
nor undermined by alterations to the withholding tax mechanisms. The committee understands
that Treasury and the ATO will need to monitor implementation and act to
rectify any urgent issues that arise.
Tax treatment of custodians holding
units in AMITs
2.28
ACSA notes that the treatment of the relationship between custodians and
clients has been a long-standing issue in the custodian industry. On behalf of
custodians, ACSA has consistently argued for an endorsement in the broader tax
framework of the 'look‑through' approach that is adopted by custodians
and their clients in practice for client investments.
2.29
The new tax system for AMITs explicitly introduces, in section 276‑115,
a 'look‑through' provision for a custodian holding units on behalf of a
client. ACSA believes that this provision, which only applies to AMIT
arrangements:
...is not necessary and would create confusion in the tax
legislation for the tax treatment of custodians in the broader context noted
above.[24]
2.30
ACSA proposed that section 276‑115 should be removed from the
legislation.
2.31
In response, Treasury contended that:
Section 276-115 was inserted for the benefit of custodians to
ensure that the new MIT rules interact properly with the existing tax law,
where a custodian is interposed between an AMIT and an investor. Without the
provision, there is an increased risk that the tax liability of amounts
attributed by an AMIT could arise for a custodian under the general trust tax
rules, where they would not otherwise arise. This provision also ensures that
characters of amounts attributed by an AMIT can flow through to a custodian’s
client.[25]
2.32
In addition, the introduction of section 276‑115 will not create a
look‑through precedent for custodians in other areas.[26]
2.33
The committee is satisfied that section 276‑115 plays an important
role in the new tax system and should be retained.
Cost base adjustments for AMIT
units
2.34
The new tax system for AMITs introduces upward costs base adjustments on
units where the cash distribution is less than the taxable components
attributed to a member. ACSA notes that this provision will produce different
outcomes for AMITs than the current provisions relating to certain non‑assessable
amounts paid by a unit trust to a unit holder.[27]
2.35
ACSA's concern is that there has been no announced change in policy for
cost base adjustments as would occur under the new arrangements and that the
legislation, as drafted, would lead to unintended outcomes. Indeed, ACSA
reports that:
Treasury agreed the outcome was unusual and responded by
saying the outcome was not intended and would be changed. However, the final
MIT Bill was not changed in this respect.[28]
2.36
EY also noted that there are some drafting issues with the capital gains
tax cost base uplift rules which would need adjustment.[29]
2.37
Treasury commented that the introduction of new cost base adjustment
rules is intended to benefit investors and reduce the scope of double taxation.
The AMIT tax system will result in custodians having to develop new reporting
systems as part of the implementation process and this will mean that
custodians will have to deal with MITs under both the new and existing rules. Treasury
noted the concerns of ACSA regarding the operation of the new rules:
As the new tax system for AMITs is a significant change,
Treasury and the ATO will monitor the operation of the new rules to identify
and rectify any unintended consequences.
We will consider this issue further in consultation with
industry and the ATO.[30]
2.38
The committee considers that the issue of cost base adjustments should be
closely monitored during the implementation phase. Treasury and the ATO should
work quickly with government to resolve any urgent issues that may rise.
Commencement date
2.39
There was some discussion in submissions about whether it was
appropriate to commence the new regime on 1 July 2016. The AIST was concerned
that:
...the change contained in the bills will require significant
investment in new technology in order to accommodate the levels of transparency
required. This is needed to ensure that at any given point in time, investors
can look through to the investments in their portfolio and the tax events
associated with them.[31]
2.40
Reflecting these concerns, AIST recommended that the commencement date
for the reforms be pushed back to 1 July 2017 thereby allowing fund managers,
custodians and other investors to put in place the systems necessary to better
utilise the new rules.[32]
2.41
Given the extensive legislative development process, however, many
stakeholders were keen to see the legislation pass and allow the AMIT tax
regime to commence. For example, EY commended:
...the speedy passage of the Bills through Parliament in order
to allow for their adoption and implementation by managed funds, administrators
and other service providers in accordance with the highly anticipated scheduled
application dates.[33]
2.42
In addition, the Tax Institute and the Business Law Section of the Law
Council of Australia noted that:
The introduction of the legislation will require significant
investment by industry. It is important for this reason that the legislation is
introduced as a matter of urgency.[34]
2.43
While acknowledging that significant investment will be required to
administer the new tax system, the committee believes that it is in the best
interests of the sector not to delay any further and to retain the commencement
date of 1 July 2016.
Committee view on the bill
2.44
The committee believes that the new tax system for AMITs is long overdue
and will modernise the tax treatment of managed investment trusts. These
reforms will make Australia more competitive in the funds management industry
and allow Australian funds to participate in the Asia Region Funds Passport.
2.45
Noting the concerns of some stakeholders, the committee is satisfied
that any unforeseen or unintended consequences that may arise during the
implementation process will dealt with by the government quickly. Further, the committee
proposes a review of the new tax system within 24 months of commencement in
order to provide an avenue through which stakeholders can also express
concerns.
Recommendation 1
2.46
The committee recommends that a comprehensive and formal post‑implementation
review of the legislation and operation of the tax system for attribution
managed investment trusts (AMITs) be undertaken by Treasury and completed by 1
July 2018.
Recommendation 2
2.47
The committee recommends that the Senate should pass the bill.
Senator Sean Edwards
Chair
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